TW Bullish on Cable

6/13/2009 2:00 AM Eastern

By: Mike Farrell

Time Warner Inc. chief financial officer John Martin told an audience at an industry conference last Thursday that despite the sluggish advertising market, cable-network growth is expected to soar over the next several years, driven by strong affiliate deals and the shift of available advertising dollars away from broadcast outlets.

Time Warner has been making moves to transform itself into a pure-play content company — shedding its Time Warner Cable distribution arm in a spinoff that netted the former parent company a $9.2 billion dividend and most recently announcing plans to separate its troubled AOL online unit.

At the Credit Suisse Media and Communications Convergence conference in Dana Point, Calif., last week, Martin said the cable networks business will be stronger than ever.

“Once you spin off AOL, 70% of the profits of the company are coming from cable networks,” Martin said. “It's our view that the cable-network space — and not all cable networks are created equal — but that space in general may be the best place to be in media over the next three to five years.”

Martin's optimism was fueled by two factors — a steady revenue stream from affiliate fees and the growing trend for advertisers to shift their ad dollars from broadcast television to cable. He pointed to its TNT network, which gets higher ratings for its National Basketball Association contests than the broadcast networks. TNT also has a strong slate of original programs — 13 original shows this year, compared to none in 2005.

Martin estimated that half of Turner Broadcasting System's revenue comes from affiliate fees that have baked in contractual increases every year.

“The secular dynamics of the ad business in cable networks are really good as we continue to believe we're going to take advantage of what are really, really challenging trends in broadcast right now and that's not likely to change anytime soon,” Martin said. “And we are going to manage the cost side so that we're going to grow expenses at a slower rate than revenue. So the cable networks should be a top line story as well as a margin expansion story.”

Despite cable's success, however, CPMs (costs per thousand) for cable seriously lag those for broadcast shows. Martin estimated that cable in general attracts 60% of the audience, but just 29% of the ad revenue. He added that is a little better at Turner (which he estimated gets about two-thirds the CPM awarded a typical broadcaster), but the overall CPM gap is beginning to close.

That was evident last year, which Martin said was the first year that cable networks saw any movement at all in the CPM gap. While it is unlikely that gap will close completely, it should continue to narrow, he said.

“I don't think we are under any notion or expectation that the gap is going to close that quickly and it doesn't have to,” Martin said. “There is so much money sitting there that can come over to cable, if we get a little bit of that every year, it's going to be good news for us.”

“In general, our view is that as money moves from broadcast to cable, as audiences have moved from broadcast to cable, those networks that should benefit the most are those that look and feel like the broadcasters,” Martin said. “Those networks that are general entertainment, but targeted, those that have the scale, the reach and the type of quality programming that advertisers that were comfortable with the branded environments they were buying on broadcast can feel equally as comfortable, if not more comfortable, with the branded environments they are buying on cable.”

Martin pointed out that Time Warner withstood some harsh criticism several years ago when it decided to invest its resources in building its general-entertainment channels and programming, rather than launching a slew of niche networks.

“Now, as we sit here and we look at the television landscape, that strategy has proven to be pretty good,” Martin said. “The value of any niche networks being launched now is probably a little suspect.”

Martin had little to say concerning TV Everywhere, the concept spearheaded by his boss, Time Warner chairman and CEO Jeff Bewkes, that pay TV customers should be able to access the content available on the television sets online.

The CFO said that Time Warner is working toward making the concept a reality, adding that while the threat of online programming is still pretty small — he estimated about one half of 1% of all viewing is done on the Internet — it is a growing segment.

“There's been a fair amount of recognition that this is probably the way things are going to evolve,” Martin said. “We're well on our way, but there is more work to do.”

Later in the conference, Time Warner Cable chief operating officer Landel Hobbs said the biggest roadblock to TV Everywhere isn't technology, but establishing a set of business rules to govern the service.

“How many simultaneous users do you allow before you cut them off, because maybe a college kid is giving away his password to everybody on the dorm floor?” Hobbs asked. “What content stays in front of the curtain versus behind the curtain? Those are the business rules that need to be discussed.”